2.4 Attitudes to risk and financial choices

Attitudes to risk

Vary from person to person

What is the term for people who avoid taking risks in all aspects?

Being risk averse

What is the term for people who are willing to take more risk?

Being risk tolerant

What are the 4 categories of risks?

1) Physical risk

2) Emotional risk

3) Risk to reputation

4) Financial risk

What do physical risks include?

• Hazardous sports and activities such as parascending or bungee jumping

• More subtle risk such as drinking alcohol, sunbathing or smoking which have the potential to cause long-term damage to health

What is often linked to some people being more willing to take greater risks with their personal safety than others?

• This attitude may be linked to life stage with younger people often more willing to take physical risks than older people

• This is partly because of their physical fitness but also because they have no dependents

Why do people act differently when they have dependents?

Once people are responsible for others they tend to reduce the risks they take and seek to protect their dependants from the financial consequences of the breadwinner or the main care-giver being injured or killed

2) Emotional risks

Emotional risks include trusting other people such as friends, partners and spouses and so risk being hurt by that person

How may people try to minimise the financial consequences of these emotional risks?

Making pre-nuptial arrangements that keep their finances when they marry

3) Risk to reputation

An example of a risk to reputation would be borrowing money and not repaying it on time: the borrower’s behaviour affects the way they are regarded by other people.

• This can have an impact on the amount of money that person can borrow in the future and at what cost

4) Financial risk

An example of a financial risk would be putting money in an investment that might fall in value, or gambling

What happens when someone buys shares in a company?

They become a part-owner of that company

How is the value of shares determined?

By how much profit the company makes

• Their value can rise but they can also fall if the company is not profitable

How can people’s attitude to risk be influenced?

By the stage they have reached in the life cycle

Give an example that certain events are more likely to happen at certain stages

• Older people are more likely to suffer from poor health

• This means that paying for health insurance may be more important to people in late middle or old age than it is to people in the young adult stage

Why can the consequences of risks be more damaging at different stages of the life cycle?

Someone who loses all their investment in a company when they are a young adult for example, has many potential years of earnings to rebuild their saving compared to someone in the late middle age who would have just a few working years left to save

Why may people want to take less financial risks as they move through the life stages?

Greater financial demands may be placed on them as they get older such as being responsible for dependents.

Their attitude to risk therefore influences …

Their financial decisions

Why might some people become more risk tolerant as they move through the life stages?

• They have not had any of the situations that might have presented risk to them like illnesses or redundancy arise to them

• Have financial arrangements in place that cater for most of their needs and so may be more willing to take risk with any money they have remaining